In a recent blog entry, I discussed the misleading concept that some debtors think of themselves as "judgment proof". However a recent question from a client about insolvency as an "alternative" to bankruptcy indicated that another article on the topic might be warranted.
There are two types of insolvency: (1) cash flow insolvency, where you cannot pay your debts as they come due; and (2) balance sheet insolvency, where the debts exceed the value of your assets. Insolvency might make a bill collector's job more difficult, it is NOT as a legal defense to the nonpayment of debts and cannot protect you from a lawsuit for unpaid bills.
You cannot be "declared" insolvent nor can you "claim" insolvency except perhaps when dealing with debt forgiveness income on your tax return. If a debtor settles a creditor card debt for less than the full amount owed, they will send out a 1099 to the debtor and the IRS. If the debtor meets the definition in the Internal Revenue Code for insolvency, the debt forgiveness might not be counted as taxable income. However, the creditor is free to file a lawsuit and get a judgment to garnish the debtor's wages.
Insolvency by itself is not an alternative to bankruptcy. It is a bit like trying to hide assets or doing nothing in the hope that creditors won't find anything. It is also like running and hiding from a bully. Sometimes you need to confront the bully.
If you are in Southern California and are tired of running from your creditors and the harassing phone calls, please call me today and (619) 448-2129 for a free consultation.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar, the San Diego County Bar Association and the National Association of Consumer Bankruptcy Attorneys. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.
Insolvency is certainly not bankruptcy, it's astonishing how many people still confuse the two.
I agree the differnce between incolvency and bankruptcy should be made very clear so to avoid any confusion.
it's important that people understand the difference between the two- particularly as it can have an effect on your future.
I too am always shocked at how people put the two terms under one umbrella.
Before an insolvent company or person gets involved in insolvency proceedings, it will likely be involved in more informal arrangements with creditors, such as making alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in the forecasted cash inflow or from an increase in cash expenses.
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